What's the point of PMI?

alvin · #1 (**permalink**) 01-04-2006, 05:03 PM

i understand if a buyer were to put a 20% downpayment this would eliminate the PMI and have 1 loan at 80%.

if a buyer were to do 100% O/O financing, and you have an 80/20 loan, does the PMI still exist?

when the buyer eliminates PMI, what are they really eliminating? high interest rate on the 2nd mortgage note?

thanks

note: im not a L/O, just a realtor

Greg · #2 (**permalink**) 01-05-2006, 06:08 AM

No the purpose of the 80/20 is to avoid PMI so it is not charged on that type of loan.

PMI protects the lender from loss. Say the lender forecloses. They sell the home at sheriff's sale. The winning bidder pays 85k for a home with a 100k mortgage.

PMI covers the gap. It is almost like GAP coverage on a car. (How about that Rick!)

When a buyer eliminates PMI they are eliminating the premium they pay to the PMI Company. It is like an insurance premium a borrower pays in addition to the mortgage principle and interest payment (Or interest, or 1% option arm payment)

Make sense Alvin?

alvin · #3 (**permalink**) 01-05-2006, 10:22 AM

yup. thanks greg.

how much is that PMI premium?

CLOSER · #4 (**permalink**) 01-05-2006, 01:32 PM

PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment.

Greg · #5 (**permalink**) 01-05-2006, 05:58 PM

Good addition Closer! Very true.

Alvin I will work on an 80/20 vs a 100% scenario and email it to you. Give me some time I am getting swamped. Those mailers are responding guys. Realtors are inquiring about referal relationships. I will expand more in marketing as to what the content of my mailer was.